Reader's Digest faces bankruptcy filing

Reader's Digest Association, the magazine publisher, has hired lawyers to explore restructuring options including a possible bankruptcy filing, a person familiar with the situation says.

Kirkland & Ellis has been asked to evaluate options for the US company that include a possible "pre-packaged" or "pre-arranged" bankruptcy in which much of the restructuring work is completed out of court, the person said.

A pre-packaged bankruptcy is more advanced than a prearranged bankruptcy as it already has agreements from creditors about the outcome of a reorganisation.

Reader's Digest, first published in 1922, has offices in 45 countries and publishes 92 magazines. It operates 65 websites and sells 68 million books, music or video products every year, according to its website.

The company was bought for US$2.4 billion ($4.8 billion) in March 2007 by a group of investors led by Ripplewood Holdings, and merged with Ripplewood portfolio company WRC Media and Direct Holdings US Corp.

The company's restructuring could take "a number of different forms: an out of court restructuring, an in-court restructuring, or a debt buyback," said John Puchalla, a Moody's analyst who covers Reader's Digest.

Puchalla added that the company had flexibility on its covenants with lenders.

Moody's said in a credit opinion on February 18 that Reader's Digest's capital structure appeared "unsustainable" and might violate its covenants or restructure within the next year to 18 months.

The company faced pressure on cashflow from declining demand for its print-based products and a drop in consumer spending, the ratings firm said.

Reader's Digest announced on January 28 it would eliminate about 8 per cent of its 3500 staff positions worldwide, citing a drop in consumer spending and magazine advertising in most markets.

Reader's Digest also said at the time that it would require US workers to take five days of unpaid time off in each of its 2009 and 2010 fiscal years, and suspend matching contributions to retirement plans.

Reader's Digest is the latest in a series of publishing or media companies to explore the possibility of restructuring.

All cited the rise of internet publishing and decline in advertising.

Reader's Digest's US$600 million in 9 per cent notes due in 2017 most recently traded at 9c on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Their 52-week high was 60.75c on the dollar, hit on September 4.

- BLOOMBERG